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The HSA: The Perfect Retirement Account For Millennials

Read enough personal finance blogs and at some point, you’ll probably stumble across someone writing about the “secret” retirement account known as the Health Savings Account (“HSA”).  For those of us who are entrenched in the personal finance world, the HSA really isn’t all that much of a secret.  Most of us who are into this money stuff know that it’s a pretty advantageous savings vehicle.

The thing that I think doesn’t get pointed out enough is how perfect the HSA is for millennials.  By giving yourself access to an HSA, you get two awesome things.  You gain an extra tax-advantaged account that can really help you maximize your savings.  And you lower your monthly health insurance premiums at a time in your life when you probably have very low healthcare costs.

I wish I’d known about the HSA back when I started my first job.  I remember sitting down in a room and filling out all my work forms.  Since I had no idea what I was doing, I just filled them out the way a normal person does.  Most people at my firm (me included), had no idea what an HSA was.  Because I’d never even heard of that type of account, I ended up just picking the normal health insurance plan that the majority of people at my firm pick.

We here at Financial Panther know that doing things normally isn’t always the way to go.  The HR person probably didn’t think about the fact that a pretty healthy 26-year old isn’t the type of person that’s going to have a huge need for high-end health insurance.  Had I known better, I would’ve gone with a High Deductible Health Plan (“HDHP”), instead of the normal health insurance option.

By not understanding my choices, I ended up basically spending two years paying health insurance premiums that I didn’t really need to pay.

What Is An HSA?

The basics of an HSA are pretty simple.  At its core, it’s a tax-advantaged account just like an IRA or a 401(k).  Money gets deposited into the account pre-tax just like with any other tax-advantaged account.  While it’s in the account, it can grow tax-free as well.

The beauty of the HSA comes on the withdrawal.  If you use the money for qualified healthcare expenses, you get to take that money out tax-free.  As far as I can tell, it’s the only triple tax-advantaged account out there, meaning that you could potentially pay no taxes on your contributions at all.  Depending on which state you live in, your 529 could serve as a triple tax-advantaged account for state taxes.

Here’s the catch, though – an HSA is only available to you if you’re signed up for an HDHP.  So what the heck is an HDHP?  There’s a boring definition for it that you (and I) probably won’t remember. My advice – talk to your employer and find out if any of your health insurance options are an HDHP and if so, whether it qualifies you to contribute to an HSA.  Most employers will be able to give you that information.

The fact that an HSA is only available in certain circumstances is why picking the right health insurance option at your job is so important.  If you pick the wrong plan like I initially did, you lose out on the option to contribute to an HSA and you’ll end up paying more for health insurance compared to what you really need.  And the thing about health insurance is you can’t just change it anytime.  You generally can only change your health insurance plan during open enrollment, so you need to make sure you pick the right one for you.

Use An HSA And Get As Much Tax-Advantaged Space As Possible

I’m a big believer in maximizing your tax-advantaged space.  It’s why I think picking up a side hustle and using a Solo 401(k) is awesome since you can get yourself more space to save.

Your typical person will probably only give themselves access to two tax-advantaged accounts – a normal 401(k) and an IRA or Roth IRA.  As of 2017, you can put away $18,000 into a 401(k) and $5,500 into an IRA or Roth IRA.  That’s good for $23,500 per year of tax-advantaged savings.

But, if you sign up for an HDHP, you give yourself access to another $3,400 per year of tax-advantaged savings (as of 2017). This means that signing up for an HDHP increases your tax-advantaged space by a little over 14%.  That’s pretty sweet.  If you think about it over the long term, that extra savings could easily end up being an extra $400,000 or more, depending on the time frame.

The HSA also opens itself up to an interesting tax use.  Since the IRS doesn’t require you to pay for healthcare expenses in the same year that you incur them, you can pay for your healthcare expenses out of pocket, then reimburse yourself from your HSA contributions years later.  This allows your money to grow tax-free for a ton of time.  And once you hit 65 years old, you can withdraw any of your HSA contributions just as if it were a normal IRA.

The HSA (And HDHP) Is Made For Millennials

There’s a reason why I think the HSA (and the HDHP that you need in order to get the HSA) is designed for millennials.  If you’re like most millennials, you probably aren’t a heavy user of health care.  Since I started working in 2013, I’ve been to the doctor a grand total of zero times.  I know, I should probably be going more often.  I will say that it’s not the HDHP that’s preventing me from going to the doctor.  As I understand it, preventative care is covered by an HDHP.

Laziness aside, though, the main reason I don’t go to the doctor very often is because I’m generally healthy.  My guess is that most millennials are probably pretty healthy too.  When I made the switch to an HDHP, my monthly premiums dropped by half!  Sure, I’d be on the hook for more of the deductible, but since I keep a decent sized emergency fund and rarely need to go to the doctor, it doesn’t make much sense for me to pay more for health insurance that I’m probably not going to use.  Why not save that money and give myself more tax-advantaged space?

Dr. Hibbert doesn’t approve of me not going to the doctor more often.

Going with an HDHP (and gaining access to an HSA) might not be for everyone.  If you are a heavy user of healthcare, you might want to stick with a beefier health insurance option.  But if you’re a millennial in good health, you’re probably not the type that’s spending a ton on healthcare.  My guess is that you’ll get much more benefit by going with an HDHP and contributing the money you save on premiums towards your HSA.

To my fellow millennials, did you know about the HSA when you started your first job? Do you spend very much on healthcare costs?


  1. The Accountant The Accountant

    Great post! I’ve been doing my research on HSA’s since reading a previous post about how it’s the “stealth retirement account.” I’ve been trying for a few months to open one up on my own, but I can’t figure out if I qualify or not. Reading the IRS website, it seems like there are 3 rules: can’t be a dependent, must be on a HDHP, and can’t have an FSA. I qualify for the HSA based on those rules, but it also says to call your plan and ask them. When I call and ask, no one can give me a straight answer. My company does offer HRA. Does that disqualify me from setting up an HSA? Just wondering if you have any more information on this topic!

    • Hey Accountant! Based on what you’re telling me, it seems like you should be able to have access to an HSA. There are special rules with an HRA though, and unfortunately, I just don’t know enough about HRAs to really tell you. I feel like someone in your HR department should be able to help you though. I think almost all employers have their preferred HSA provider for when you do payroll deductions into your HSA, so they should know whether your health plan allows you to contribute to an HSA.

  2. Great post, FP. I love my HSA – it was really handy when my wife and I had our first child last year.

    One other advantage, making it a quadruple tax-advantaged savings account, is there are no FICA taxes if you direct deposit from your check into your HSA!

    For my HSA, I keep enough in cash (not invested) to cover my premium for one year. I invest the rest. Although my investment options (I use Optum) aren’t the lowest cost, I still max out my HSA because of the tax advantages FP pointed out in his post!

    • As far as I know, contributing to an HSA is the only way to reduce your FICA taxes. I actually have a post coming out later this week with questions to ask when looking at your HSA. I started trying to put them all in one post and it was way too long!

      What type of funds does Optum offer? My employer has their HSA through Select Account, and it originally had awful investment options. A few months back, they switched over to Vanguard funds though, so it’s got good options now!

      • Not great fund options with Optum. There are a few funds with less than a 1% expense ratio, but nothing that compares with Vanguards low cost index funds!

  3. I first learned about healthcare options the hard way. When I started my first job out of college, I had no idea what healthcare plan to select. My parents helped me choose one and recommended a high deductible plan since I was young and rarely went to the doctor. A year into my job I was working out of town and got a mean case of food poisoning. After throwing up my entire innards, I finally went to the emergency room. About a month later I was greeted with a $1,200 hospital bill. My first thought was, don’t I have insurance?! I had no clue about my health insurance plan.

    I learned quickly after that and my company eventually started matching contributions to an HSA dollar for dollar up to $1,200 for an individual. Very easy to grow a nice big HSA account that way. I don’t miss much about my old job but I do miss my high deductible plan with the HSA match. My current employer doesn’t offer a high deductible plan, but I can’t complain too much. It’s a good inexpensive plan.

    • Would you say that going with the HDHP when you were young was a mistake then? Or is the problem that you didn’t have much saved away for emergencies? I think for most young people, a $1200 hospital bill is probably really rare.

      Also, $1200 match is huge! That’s basically a third of your yearly HSA limit covered for free!

      • Oh, definitely not a mistake. I just didn’t know what the hell I was doing with healthcare plans. I had the money to pay the bill, just was shocked to be paying a bill in the first place because I had no idea how health insurance worked at the time.

        And yes, a $1,200 hospital bill is very rare for a 25 year old. I’m the type of person that doesn’t go to the doctor unless I’m on my deathbed, and I definitely felt like I was on my way there!

        The $1,200 match was awesome and I took full advantage of it at the time. But sadly, three eye surgeries later and my HSA account is at zero today.

        • Bummer. That’s the one thing that I find problematic with the HSA. Since the contribution limits are pretty low, you basically need to hope you have a few years of good health before it can really get to a decent sum. I guess that’s another bonus for why it’s good for most millennials to take advantage of.

  4. I have to admit that I knew nothing about HSA’s until I started blogging. I thought I knew a ton about finances but it’s clear I still more to learn 🙂 It’s such a great benefit if you have the ability to invest in.

    Thanks for sharing!!!

    • Thanks, MSM. Honestly, no one teaches us about this stuff. The vast majority of my friends, most of whom rarely go to the doctor, still pay insurance premiums they probably don’t need to pay, while foregoing the opportunity to get themselves some extra tax-advantaged space. It took me a long time before I realized that going with an HDHP, especially while I’m young and never go to the doctor, is the way to go for me.

  5. Okay, this might be a weird question, but if you go on vacation outside the country, can you use money inside your HSA to buy travel insurance? I know it doesn’t apply for us, Canadians, but curious as to how it works for Americans.

    Good job and keeping fit and not having to see the doctor! All that hustling you did with bike deliveries is really paying off!

    • I don’t think we can use our HSA funds to buy travel insurance. Is there something like an HSA in Canada that lets you do that?

      The only risk with the biking is that I risk getting hit by a car! Luckily, I wear a helmet and my city has really good bike infrastructure and bike awareness (we’re regularly ranked the #1 or #2 biking city in the US).

      • Well, in Canada, we have socialize healthcare, so no need for HSA equivalent 🙂 But we have less tax sheltering vehicles in general and higher taxes compared to Americans, so it all kind of balances out.

        Yes, I guess that is a risk so that’s good that you are taking safety pre-cautions. Though I think the risk of heart disease by not exercising is WAY higher than getting hit by a car.

        • Oh right! I forgot that Canada does things a lot better than we do in the states 🙂

  6. Love our HSA. I should note that I’m not a millennial, but we’ve been using a HDHP and HSA for a few years now. We’ve got a large portion of it invested and keep enough in cash to cover our out of pocket max. As a family, we’re able to contribute $6750 each year.

    This year, we’ll burn through much of the cash portion and will definitely meet our deductibles, but we’re able to save quite a bit on the years we don’t have many medical expenses. I know some people pay for medical expenses out of pocket to build up the HSA – I do this on the smaller expenses, but am relying on the HSA money this year as we’re looking at a few thousand out of pocket.

    • Would you say that the HSA is still the way to go even with a family? I think for us, we’ll likely stick with an HSA since we’re both pretty healthy, but I’ve always wondered how having kids changes the need for a beefier health insurance option.

  7. I really enjoy utilizing the HSA. I also have been to the doctor zero times since I have started my new job. The only purchase I have made out of mine was $100 for new contacts, but from now on, I’m just going to pay out of pocket.

    I’m also on the HDHP. I was always taught to never go with HDHP, but then I realized that was a different generations thinking. My emergency fund + my HSA equal significantly more than my deductible, so even if something catastrophic happened, I’m still covered.

    Saving money each month and still knowing I’m covered makes me sleep much better at night.

    • That’s probably why a lot of people just default into the normal health insurance plan. They just assume that’s the way to go because it sounds like the best insurance option.

      It seems like when you’re young, your chances of really needing to use your health insurance are pretty low. And exactly, if you’ve got an emergency fund, you’re basically covering yourself anyway.

  8. Something to be aware of, high health care costs also don’t necessarily rule out the HDHP. Typically the difference between the two follows a sort of donut hole approach where the HDHP comes out ahead for very low health expenditures and very high. Low deductible accounts come out ahead usually only in health expenditures that fall between the two deductibles/out of pocket maximums.

    My employer no longer offers a plan other then high deductible, so HSA is a given.

    • Good point! Didn’t think about it that way but you’re probably right with respect to which types of health insurance plans come out ahead. Someone smarter than me could probably do the math on that!

  9. So glad to finally understand HSAs. Thank you for the insight. My job offers it but I was too lazy to look into it! And in the past 6 months $1800 have come out of my paycheck to cover this. This will be something to consider once benefit changes open up again. The only question I have now is if a flexible spending account is something different than an HSA?

    • I’m glad you found this now. I’ll definitely bring this up again near the end of the year when open enrollment starts again.

      An FSA is totally different from the HSA. With an FSA, you basically put money in tax-free, but then you have to use it before the end of the year. Otherwise, the money goes right back to your employer. HSAs, on the other hand, are basically like another retirement account that happens to be able to be used for a health care costs. FSAs work for people who have fixed expenses that they know about before hand, but in my opinion, HSA is the way to go.

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